FMX | Connect (Reported 7/18/2011)
The following is a report of Gold Option’s activity in the Over-The- Counter and Exchange traded venues. Information is compiled and summarized below.
Summary
August Gold settled at $1602.40 per troy ounce, a gain of $12.30 for the day.
Market Recap:
August futures drifted upward over the weekend, restlessly buoyed by whispers of sovereign default. Bullion’s climb to new highs seemed almost effortless; for many, it is seen as long overdue.
Options trading remains dynamic. Calls are bid and volatility continues to perform. August options are due to expire on Tuesday, yet remain vibrant, a function of high uncertainty and weighty open interest. The August 1600 Call had roughly 26,000 lots of open interest going into Friday and 24,000 lots remaining going into today. This is the benchmark and this is the option that all market participants are watching. August 1600-1700 Calls, Call spreads, and ratio call spreads continue to command much of the interest. September has become increasingly important as traders roll positions and cover shorts from an expiring August. Speculators have taken a renewed interest in back month calls, paying particular attention to October and December.
Directional Commentary: Options: Options continue to perform strongly on all-time highs. Volatility is bid on higher moves in the underlying and put skew continues to come under pressure. The big story in options remains the open interest in the 1600 Call and how the owners will proceed as the week continues. Traditionally, when strikes get pinned, an autopsy reveals that the longs were fragmented and undercapitalized relative to the shorts: the shorts were strong hands, generally dealers who did not have to worry about short term moves in the market adversely affecting them. The longs are generally undercapitalized, have a much lower pain tolerance and much trade more aggressively to survive. In this situation however we have a potentially inverted situation. We have good reason to believe a long chunk of the longs are in the hands of a well-heeled speculator who is not apt to “hedge gamma or scalp futures” against his position. We believe this long is looking for a home run. On the other side of the equation are the usual liquidity providers, the fragmented, undercapitalized traders who have taken the other side of this speculative position. The wild card is the bullion dealer sector. Some are long the strike and some are short the strike. As it currently stands, we think this market is less likely to pin the strike than in past situations. A recent example of this occurred in silver. The May 40 Calls had significant open interest and many people expected a pin of the strike. Instead, what the market saw was a pause and blow-through to the upside. The longs were strong and not concerned with day to day movement. Conclusion: Bullish
Technical: Gold formed a hanging man on the daily chart Friday, telling us we should remain cautious, despite our bullish sentiment. The market disregarded this formation, traded to new highs and settled above previous highs. There are still reasons to remain cautious; the pin risk approaching expiration should be of particular concern. That being said, the market seems to be in a momentum phase right now and both Slow Stochastic and Relative Strength Indicators are suggesting we haven't reached the top yet. We think this market is likely to continue to the 1635-1645 area before potentially seeing a pullback. The market formed new support on top of Friday’s hanging man formation. In a down move we expect buying to continue through the 50-day moving average at 1527.20, where the market acquires a more bearish bent. Conclusion: Bullish
Active Options
Q 1600/1620 C. spread
Q 1650 C
U 1800 C
Z 1350 P
ATM Volatility Curve:
As of 4:00 P.M.
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| Q11 | 1600 | 31 | 35 |
| U11 | 1605 | 71 | 75 |
| V11 | 1605 | 100 | 104 |
| X11 | 1605 | 122 | 126 |
| Z11 | 1605 | 140 | 144 |
| F12 | 1605 | 163 | 167 |
| G12 | 1605 | 180 | 184 |
| H12 | 1605 | 195 | 199 |
| J12 | 1605 | 212 | 216 |
| K12 | 1610 | 225 | 229 |
| M12 | 1610 | 232 | 236 |
As of 4:00 P.M.
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